Professional Documents
Culture Documents
Treatments, Income Tax Treatments. The Appendix Explains How To Recognise and
Treatments, Income Tax Treatments. The Appendix Explains How To Recognise and
Treatments, Income Tax Treatments. The Appendix Explains How To Recognise and
Headings Details
Appendix C, MCA has inserted a new Appendix C to Ind AS 12, Uncertainty over
Uncertainty over Income Tax Treatments. The appendix explains how to recognise and
Income Tax measure deferred and current income tax assets and liabilities where
Treatments, to there is uncertainty over a tax treatment. In particular, it discusses:
Ind AS 12
➢ how to determine the appropriate unit of account, and that each
uncertain tax treatment should be considered separately or
together as a group, depending on which approach better predicts
the resolution of the uncertainty;
➢ that the entity should assume a tax authority will examine the
uncertain tax treatments and have full knowledge of all related
information, i.e. detection risk should be ignored;
➢ that the entity should reflect the effect of the uncertainty in its
income tax accounting when it is not probable that the tax
authorities will accept the treatment;
➢ that the impact of the uncertainty should be measured using either
the most likely amount or the expected value method, depending
on which method better predicts the resolution of the uncertainty;
and
➢ that the judgements and estimates made must be reassessed
whenever circumstances have changed or there is new information
that affects the judgements.
Amendments to The amendments clarify that the income tax consequences of dividends
Ind AS 12 – on financial instruments classified as equity should be recognised
Income tax according to where the past transactions or events that generated
consequences of distributable profits were recognised. These requirements apply to all
payments on income tax consequences of dividends. Previously, it was unclear
financial
whether the income tax consequences of dividends should be
instruments recognised in profit or loss, or in equity, and the scope of the existing
classified as guidance was ambiguous
equity
Amendments to The amendments to Ind AS 19 clarify the accounting for defined benefit
Ind AS 19 – Plan plan amendments, curtailments and settlements. They confirm that
amendment, entities must:
curtailment or
settlement ➢ calculate the current service cost and net interest for the
remainder of the reporting period after a plan amendment,
curtailment or settlement by using the updated assumptions from
the date of the change;
➢ any reduction in a surplus should be recognised immediately in
profit or loss either as part of past service cost, or as a gain or loss
on settlement. In other words, a reduction in a surplus must be
recognised in profit or loss even if that surplus was not previously
recognised because of the impact of the asset ceiling; and
➢ separately recognise any changes in the asset ceiling through
other comprehensive income.
Amendments to In computing the capitalisation rate for generally borrowed funds, the
Ind AS 23 – entity should exclude borrowing costs on borrowings which are
Borrowing costs specifically used for the purpose of obtaining a qualifying asset until
eligible for that specific asset is ready for its intended use or sale. Once such
capitalisation specific asset is ready for its intended use or sale, borrowing costs
related to borrowings of such asset shall be considered as part of
general borrowing costs of the entity and be used for computation of
capitalisation rate on general borrowings.
Amendment to An entity’s net investment in associate or joint venture includes
Ind AS 28 - Long- investment in ordinary shares, other interests that are accounted using
term Interests in the equity method, and other long term interests, such as preference
Associates and shares and long term receivables or loans, the settlement of which is
Joint Ventures neither planned nor likely to occur in the foreseeable future. These
long term interests are not accounted for in accordance with Ind AS 28,
instead they are governed by the principles of Ind AS 109.
As per para 10 of Ind AS 28, the carrying amount of entity’s investment
in its associate and joint venture increases or decreases (as per equity
method) to recognise the entity’s share of profit or loss of its investee
associate and joint venture.
Ind AS 102
3. QA Ltd. had on 1 st April, 20X1 granted 1,000 share options each to 2,000 employees.
The options are due to vest on 31 st March, 20X4 provided the employee remains in
employment till 31 st March, 20X4.
On 1st April, 20X1, the Directors of Company estimated that 1,800 employees would
qualify for the option on 31 st March, 20X4. This estimate was amended to 1,850
employees on 31 st March, 20X2 and further amended to 1,840 employees on
31st March, 20X3.
On 1st April, 20X1, the fair value of an option was ` 1.20. The fair value increased to
` 1.30 as on 31st March, 20X2 but due to challenging business conditions, the fair value
declined thereafter. In September, 20X2, when the fair value of an option was ` 0.90,
the Directors repriced the option and this caused the fair value to increase to ` 1.05.
Trading conditions improved in the second half of the year and by 31 st March, 20X3 the
fair value of an option was `1.25. QA Ltd. decided that additional cost incurred due to
repricing of the options on 30 th September, 20X2 should be spread over the remaining
vesting period from 30th September, 20X2 to 31st March, 20X4.
The Company has requested you to suggest the suitable accounting treatment for these
transaction as on 31 st March, 20X3.
Ind AS 109
4. An entity purchases a debt instrument with a fair value of ` 1,000 on
15th March, 20X1 and measures the debt instrument at fair value through other
comprehensive income. The instrument has an interest rate of 5% over the contractual
term of 10 years, and has a 5% effective interest rate. At initial recognition, the entity
determines that the asset is not a purchased or original credit-impaired asset.
On 31st March 20X1 (the reporting date), the fair value of the debt instrument has
decreased to ` 950 as a result of changes in market interest rates. The entity
determines that there has not been a significant increase in credit risk since initial
recognition and that ECL should be measured at an amount equal to 12 month ECL,
which amounts to ` 30.
On 1st April 20X1, the entity decides to sell the debt instrument for ` 950, which is its fair
value at that date.
Pass journal entries for recognition, impairment and sale of debt instruments as per
Ind AS 109. Entries relating to interest income are not to be provided.
Ind AS 23
5. On 1st April, 20X1, entity A contracted for the construction of a building for ` 22,00,000.
The land under the building is regarded as a separate asset and is not part of the
qualifying assets. The building was completed at the end of March, 20X2, and during the
Entity A’s borrowings at its year end of 31st March, 20X2 were as follows:
a. 10%, 4-year note with simple interest payable annually, which relates specifically to
the project; debt outstanding on 31st March, 20X2 amounted to ` 7,00,000. Interest
of ` 65,000 was incurred on these borrowings during the year, and interest income
of ` 20,000 was earned on these funds while they were held in anticipation of
payments.
b. 12.5% 10-year note with simple interest payable annually; debt outstanding at
1st April, 20X1 amounted to ` 1,000,000 and remained unchanged during the year; and
c. 10% 10-year note with simple interest payable annually; debt outstanding at
1st April, 20X1 amounted to ` 1,500,000 and remained unchanged during the year.
What amount of the borrowing costs can be capitalized at year end as per relevant
Ind AS?
Ind AS 115
6. An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a ma chinery
for `20,00,000. P Ltd. intends to use the said machinery to start a food processing unit.
The food processing industry is highly competitive and P Ltd. has very little experience in
the said industry.
P Ltd. pays a non-refundable deposit of `1,00,000 at inception of the contract and enters
into a long-term financing agreement with G Ltd. for the remaining 95 per cent of the
agreed consideration which it intends to pay primarily from income derived from its food
processing unit as it lacks any other major source of income. The financing arrangement
is provided on a non-recourse basis, which means that if P Ltd. defaults then G Ltd. can
repossess the machinery but cannot seek further compensation from P Ltd., even if the
full value of the amount owed is not recovered from the machinery. The cost of the
machinery for G Ltd. is ` 12,00,000. P Ltd. obtains control of the machinery at contract
inception.
When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance
with Ind AS 115?
Ind AS 1
7. An entity has taken a loan facility from a bank that is to be repaid within a period of
9 months from the end of the reporting period. Prior to the end of the reporting period,
the entity and the bank enter into an arrangement, whereby the existing outstanding loan
will, unconditionally, roll into the new facility which expires after a period of 5 years.
(a) Should the loan be classified as current or non-current in the balance sheet of the
entity?
(b) Will the answer be different if the new facility is agreed upon after the end of the
reporting period?
(c) Will the answer to (a) be different if the existing facility is from one bank and the
new facility is from another bank?
(d) Will the answer to (a) be different if the new facility is not yet tied up with the
existing bank, but the entity has the potential to refinance the obligation?
Ind AS 10
8. ABC Ltd. received a demand notice on 15th June, 2017 for an additional amount of
` 28,00,000 from the Excise Department on account of higher excise duty levied by the
Excise Department compared to the rate at which the company was creating provision
and depositing the same. The financial statements for the year 2016-17 are approved on
10th August, 2017. In July, 2017, the company has appealed against the demand of
` 28,00,000 and the company has expected that the demand would be settled at
` 15,00,000 only. Show how the above event will have a bearing on the financial
statements for the year 2016-17. Whether these events are adjusting or non-adjusting
events and explain the treatment accordingly.
Ind AS 19
9. (All numbers in ` ’000 unless otherwise stated)
ABL Ltd. operates a defined retirement benefits plan on behalf of current and former
employees. ABL Ltd. receives advice from actuaries regarding contribution levels and
overall liabilities of the plan to pay benefits. On 1st April, 20X1, the actuaries advised that
the present value of the defined benefit obligation was ` 60,000. On the same date, the
fair value of the assets of the defined benefit plan was ` 52,000. On 1st April, 20X1, the
annual market yield on high quality corporate bonds was 5%. During the year ended 31st
March 20X2, ABL Ltd. made contributions of ` 7,000 into the plan and the plan paid out
benefits of ` 4200 to retired members. Assume that both these payments were made on
31st March 20X2. The actuaries advised that the current service cost for the year ended
31st March 20X2 was ` 6,200. On 28th February, 20X2, the rules of the plan were
amended with retrospective effect. These amendments meant that the present value of
the defined benefit obligation was increased by ` 1500 from that date. During the year
ended 31st March, 20X2, ABL Ltd. was in negotiation with employee representatives
regarding planned redundancies. The negotiations were completed shortly before the
year end and redundancy packages were agreed. The impact of these redundancies
was to reduce the present value of the defined benefit obligation by
` 8000. Before 31st March, 20X2, ABL Ltd. made payments of ` 7500 to the employees
affected by the redundancies in compensation for the curtailment of their benefits. These
payments were made out of the assets of the retirement benefits plan. On 31st March,
20X2, the actuaries advised that the present value of the defined benefit obligation was
` 68,000. On the same date, the fair value of the assets of the defined benefit plan were
` 56,000.
Ind AS 110
10. What will be the accounting treatment of dividend distribution tax in the consolidated
financial statements in case of partly-owned subsidiary in the following scenarios:
Scenario 1: H Limited (holding company) holds 12,000 equity shares in S Limited
(Subsidiary of H Limited) with 60% holding. Accordingly, S Limited is a partly -owned
subsidiary of H Limited. During the year 20X1, S Limited paid a dividend @ ` 10 per
share and DDT @ 20% on it.
Should the share of H Limited in DDT paid by S Limited amounting to ` 24,000
(60% x ` 40,000) be charged as expense in the consolidated profit and loss of H
Limited?
Scenario 2 (A): Extending the situation given in scenario 1, H Limited also pays dividend
of ` 300,000 to its shareholders and DDT liability @ 20% thereon amounts to ` 60,000.
As per the tax laws, DDT paid by S Ltd. of ` 24,000 is allowed as set off against the DDT
liability of H Ltd., resulting in H Ltd. paying ` 36,000 (` 60,000 – ` 24,000) as DDT to tax
authorities.
Scenario 2(B)
If in (A) above, H Limited pays dividend amounting to ` 100,000 with DDT liability @ 20%
amounting to ` 20,000.
Scenario (3):
Will the answer be different for the treatment of dividend distribution tax paid by
associate in the consolidated financial statement of investor, if as per tax laws t he DDT
paid by associate is not allowed set-off against the DDT liability of the investor?
Ind AS 21
11. Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share
capital of Mark Limited, an entity registered as company in Germany. The functional
currency of Global Limited is Rupees and its financial year end is 31st March, 20X2.
(i) The fair value of the net assets of Mark Limited was 23 million EURO and the
purchase consideration paid is 17.5 million EURO on 30th September, 20X1.
(ii) DS Limited holds equity shares of a private company. In order to determine the fair
value' of the shares, the company used discounted cash flow method as there were
no similar shares available in the market.
Under which level of fair value hierarchy will the above inputs be classified?
What will be your answer if the quoted price of similar companies were av ailable
and can be used for fair valuation of the shares?
Ind AS 101
14. Mathur India Private Limited has to present its first financials under Ind AS for the year
ended 31st March, 20X3. The transition date is 1st April, 20X1.
The following adjustments were made upon transition to Ind AS:
(a) The Company opted to fair value its land as on the date on transition.
The fair value of the land as on 1st April, 20X1 was ` 10 crores. The carrying
amount as on 1st April, 20X1 under the existing GAAP was ` 4.5 crores.
(b) The Company has recognised a provision for proposed dividend of ` 60 lacs and
related dividend distribution tax of ` 18 lacs during the year ended
31st March, 20X1. It was written back as on opening balance sheet date.
(c) The Company fair values its investments in equity shares on the date of transition.
The increase on account of fair valuation of shares is ` 75 lacs.
(d) The Company has an Equity Share Capital of ` 80 crores and Redeemable
Preference Share Capital of ` 25 crores.
(e) The reserves and surplus as on 1st April, 20X1 before transition to Ind AS was ` 95
crores representing ` 40 crores of general reserve and ` 5 crores of capital reserve
acquired out of business combination and balance is surplus in the Retained
Earnings.
(f) The company identified that the preference shares were in nature of financial
liabilities.
What is the balance of total equity (Equity and other equity) as on 1st April, 20X1 after
transition to Ind AS? Show reconciliation between total equity as per AS (Accounting
Standards) and as per Ind AS to be presented in the opening balance sheet as on
1st April, 20X1.
Ignore deferred tax impact.
Ind AS 24
15. Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in
ABC Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited.
ABC Limited has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the
Key management personnel in PQR Limited. ·
(a) Determine the entity to whom exemption from disclosure of related party
transactions is to be given. Also examine the transactions and with whom such
exemption applies.
(b) What are the disclosure requirements for the entity which has availed the
exemption?
Ind AS 7
16. Following is the balance sheet of Kuber Limited for the year ended 31st March, 20X2
(` in lacs)
20X2 20X1
ASSETS
Non-current Assets
Property, plant and equipment 13,000 12,500
Intangible assets 50 30
Other financial assets 145 170
Deferred tax asset (net) 855 750
Other non-current assets 800 770
Total non-current assets 14,850 14,220
Current assets
Financial assets
Investments 2,300 2,500
Cash and cash equivalents 220 460
Other current assets 195 85
Total current assets 2,715 3,045
Total Assets 17,565 17,265
EQUITY AND LIABILITIES
Equity
Equity share capital 300 300
Other equity 12,000 8,000
Total equity 12,300 8,300
Liabilities
Non-current liabilities
Long-term borrowings 2,000 5,000
Additional Information:
(1) Profit after tax for the year ended 31st March, 20X2- ` 4,450 lacs
(2) Interim Dividend paid during the year - ` 450 lacs
(3) Depreciation and amortisation charged in the statement of profit and loss during the
current year are as under
(a) Property, Plant and Equipment - ` 500 lacs
(b) Intangible Assets - ` 20 lacs
(4) During the year ended 31st March, 20X2 two machineries were sold for ` 70 lacs.
The carrying amount of these machineries as on 31st March, 20X2 is ` 60 lacs.
(5) Income taxes paid during the year ` 105 lacs
Using the above information of Kuber Limited, construct a statement of cash flows under
indirect method. Other non-current / current assets and liabilities are related to
operations of Kuber Ltd. and do not contain any element of financing and investing
activities.
Ind AS 36
17. East Ltd. (East) owns a machine used in the manufacture of steering wheels, which are
sold directly to major car manufacturers.
• The machine was purchased on 1 st April, 20X1 at a cost of ` 500 000 through a
vendor financing arrangement on which interest is being charged at the rate of 10
per cent per annum.
• During the year ended 31 st March, 20X3, East sold 10 000 steering wheels at a
selling price of ` 190 per wheel.
• The most recent financial budget approved by East’s management, covering the
period 1 st April, 20X3 – 31 st March, 20X8, including that the company expects to
sell each steering wheel for ` 200 during 20X3-X4, the price rising in later years
in line with a forecast inflation of 3 per cent per annum.
• During the year ended 31 st March, 20X4, East expects to sell 10 000 steering
wheels. The number is forecast to increase by 5 per cent each year until
31st March, 20X8.
• East estimates that each steering wheel costs ` 160 to manufacture, which
includes ` 110 variable costs, ` 30 share of fixed overheads and ` 20 transport
costs.
• Costs are expected to rise by 1 per cent during 20X4-X5, and then by 2 per cent
per annum until 31 st March, 20X8.
• During 20X5-X6, the machine will be subject to regular maintenance costing
` 50,000.
• In 20X3-X4, East expects to invest in new technology costing ` 100 000. This
technology will reduce the variable costs of manufacturing each steering wheel
from ` 110 to ` 100 and the share of fixed overheads from ` 30 to ` 15 (subject
to the availability of technology, which is still under development).
• East is depreciating the machine using the straight line method over the
machine’s 10 year estimated useful life. The current estimate (based on similar
assets that have reached the end of their useful lives) of the disposal proceeds
from selling the machine is ` 80 000 net of disposal costs. East expects to
dispose of the machine at the end of March, 20X8.
• East has determined a pre-tax discount rate of 8 per cent, which reflects the
market’s assessment of the time value of money and the risks associated with this
asset.
Assume a tax rate of 30%. What is the value in use of the machine in accordance with
Ind AS 36?
Ind AS 37
18. (a) A manufacturer gives warranties at the time of sale to purchasers of its product.
Under the terms of the contract for sale, the manufacturer undertakes to remedy, by
repair or replacement, manufacturing defects that become apparent within three
years from the date of sale. As this is the first year that the warranty has been
available, there is no data from the firm to indicate whether there will be claim under
the warranties. However, industry research suggests that it is likely that such claims
will be forthcoming.
Of the deferred tax asset balance, ` 28,000 related to a temporary difference. This
deferred tax asset had previously been recognised in OCI and accumulated in equity as
a revaluation surplus.
The entity reviewed the carrying amount of the asset in accordance with para 56 of
Ind AS 12 and determined that it was probable that sufficient taxable profit to allow
utilisation of the deferred tax asset would be available in the future.
Show the revised amount of Deferred tax asset & Deferred tax liability and present the
necessary journal entries.
20. H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as
mentioned in the below table:
On 1st January, 20X7, H Ltd. has paid ` 50 crore in cash to the selling shareholders of
S Ltd. Additionally, on 31 st March, 20X9, H Ltd. will pay ` 30 crore to the selling
shareholders of S Ltd. if return on equity of S Ltd. for the year ended 31 st March, 20X9
is more than 25% per annum. H Ltd. has estimated the fair value of this obligation as
on 1st January, 20X7 and 31 st March, 20X7 as ` 22 crore and ` 23 crore respectively.
The change in fair value of the obligation is attributable to the change in facts and
circumstances after the acquisition date.
Quoted price of equity shares of S Ltd. as on various dates is as follows :
As on November, 20X6 ` 350 per share
As on 1 st January, 20X7 ` 395 per share
As on 31st March, 20X7 ` 420 per share
On 31 st May, 20X7, H Ltd. learned that certain customer relationships existing as on
1 st January, 20X7, which met the recognition criteria of an intangible asset as on that
date, were not considered during the accounting of business combination for the year
ended 31 st March, 20X7. The fair value of such customer relationships as on
1 st January, 20X7 was ` 3.5 crore (assume that there are no temporary differences
associated with customer relations; consequently, there is no impact of income taxes
on customer relations).
On 31st May, 20X7 itself, H Ltd. further learned that due to additional customer
relationships being developed during the period 1 st January, 20X7 to 31 st March, 20X7,
the fair value of such customer relationships has increased to ` 4 crore as on
31st March, 20X7.
On 31st December, 20X7, H Ltd. has established that it has obtained all the information
necessary for the accounting of the business combination and that more information is
not obtainable.
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting.
Income tax rate applicable is 30%.
You are required to provide your detailed responses to the following, along with
reasoning and computation notes:
(a) What should be the goodwill or bargain purchase gain to be recognised by H Ltd.
in its financial statements for the year ended 31 st March, 20X7. For this purpose,
measure non-controlling interest using proportionate share of the fair value of the
identifiable net assets of S Ltd.
(b) Will the amount of non-controlling interest, goodwill, or bargain purchase gain so
recognised in (a) above change subsequent to 31 st March, 20X7? If yes, provide
relevant journal entries.
SUGGESTED ANSWERS
1. As per para 30 (c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is
recognised in each interim period based on the best estimate of the weighted average
annual income tax rate expected for the full financial year.
Accordingly, the management’s contention that since the net income for the year will be
zero no income tax expense shall be charged quarterly in the interim financial report, is
not correct.
The following table shows the correct income tax expense to be reported each quarter in
accordance with Ind AS 34:
Period Pre-tax earnings Effective tax rate Tax expense
(in `) (in `)
First Quarter 1,50,000 30% 45,000
Second Quarter (50,000) 30% (15,000)
Third Quarter (50,000) 30% (15,000)
Fourth Quarter (50,000) 30% (15,000)
Annual 0 0
2. Cheery Limited
Extract from the Statement of profit and loss
(Restated)
20X4-X5 20X3-X4
` `
Sales 1,04,000 73,500
Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
Income taxes (7,200) (4,050)
Profit 16,800 9,450
Basic and diluted EPS 3.36 1.89
Cheery Limited
Statement of Changes in Equity
Share Retained Total
capital earnings
Balance at 31 st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31 st March, 20X4 as
restated 9,450 9,450
Balance at 31 st March, 20X4 50,000 29,450 79,450
Profit for the year ended 31 st March, 20X5 16,800 16,800
Balance at 31 st March, 20X5 50,000 46,250 96,250
Extract from the Notes
Some products that had been sold in 20X3-X4 were incorrectly included in inventory at
31st March, 20X4 at ` 6,500. The financial statements of 20X3-X4 have been restated
to correct this error. The effect of the restatement on those financial statements is
summarized below:
Effect on 20X3-X4
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses 1,950
(Decrease) in profit (4,550)
(Decrease) in basic and diluted EPS (0.91)
(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)
There is no effect on the balance sheet at the beginning of the preceding period i.e.
1 st April, 20X3.
3. Paragraph 27 of Ind AS 102 requires the entity to recognise the effects of repricing that
increase the total fair value of the share-based payment arrangement or are otherwise
beneficial to the employee.
If the repricing increases the fair value of the equity instruments granted paragraph
B43(a) of Appendix B requires the entity to include the incremental fair value granted (ie
the difference between the fair value of the repriced equity instrument and that of the
original equity instrument, both estimated as at the date of the modification) in the
measurement of the amount recognised for services received as consideration for t he
equity instruments granted.
If the repricing occurs during the vesting period, the incremental fair value granted is
included in the measurement of the amount recognised for services received over the
period from the repricing date until the date when the repriced equity instruments vest, in
addition to the amount based on the grant date fair value of the original equity
instruments, which is recognised over the remainder of the original vesting period.
Accordingly, the amounts recognised in years 1 and 2 are as follows:
The cumulative loss in other comprehensive income at the reporting date was ` 20. That
amount consists of the total fair value change of ` 50 (that is, ` 1,000-` 950) offset by
the change in the accumulated impairment amount representing 12-month ECL, that was
recognized (` 30).
*Specific borrowings of ` 7,00,000 fully utilized on 1st April & on 30 th June to the extent of
` 5,00,000 hence remaining expenditure of ` 1,00,000 allocated to general borrowings.
The expenditure rate relating to general borrowings should be the weighted average of
the borrowing costs applicable to the entity’s borrowings that are outstanding during the
period, other than borrowings made specifically for the purpose of obtaining a q ualifying
asset.
Capitalisation rate = (10,00,000 x 12.5%) + (15,00,000 x 10%) = 11%
10,00,000 + 15,00,000
(b) P Ltd. lacks sources of other income or assets that could be used to repay the
balance consideration; and
(c) P Ltd.'s liability is limited because the financing arrangement is provided on a non-
recourse basis.
In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.
Further, para 15 states that when a contract with a customer does not meet the criteria in
paragraph 9 and an entity receives consideration from the customer, the entity shall
recognise the consideration received as revenue only when either of the following events
has occurred:
(a) the entity has no remaining obligations to transfer goods or services to the customer
and all, or substantially all, of the consideration promised by the customer has been
received by the entity and is non-refundable; or
(b) the contract has been terminated and the consideration received from the customer
is non-refundable.
Para 16 states that an entity shall recognise the consideration received from a customer
as a liability until one of the events in paragraph 15 occurs or until the criteria in
paragraph 9 are subsequently met. Depending on the facts and circumstances relating
to the contract, the liability recognised represents the entity’s obligation to either transfer
goods or services in the future or refund the consideration received. In either case, the
liability shall be measured at the amount of consideration received from the cu stomer.
In accordance with the above, in the given case G Ltd. should account for the non -
refundable deposit of `1,00,000 payment as a deposit liability as none of the events
described in paragraph 15 have occurred—that is, neither the entity has received
substantially all of the consideration nor it has terminated the contract. Consequently, in
accordance with paragraph 16, G Ltd. Will continue to account for the initial deposit as
well as any future payments of principal and interest as a deposit liability until the criteria
in paragraph 9 are met (i.e. the entity is able to conclude that it is probable that the entity
will collect the consideration) or one of the events in paragraph 15 has occurred. Further,
G Ltd. will continue to assess the contract in accordance with paragraph 14 to determine
whether the criteria in paragraph 9 are subsequently met or whether the events in
paragraph 15 of Ind AS 115 have occurred.
7. Para 69 of Ind AS 1 defines current liabilities as follows:
An entity shall classify a liability as current when:
(i) it expects to settle the liability in its normal operating cycle;
(ii) it holds the liability primarily for the purpose of trading;
(iii) the liability is due to be settled within twelve months after the reporting period; or
(iv) it does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period. Terms of a liability that could, at the
option of the counterparty, result in its settlement by the issue of equity instruments
do not affect its classification.
An entity shall classify all other liabilities as non-current.
Accordingly, following will be the classification of loan in the given scenarios:
a) The loan is not due for payment at the end of the reporting period. The entity and
the bank have agreed for the said roll over prior to the end of the reporting period
for a period of 5 years. Since the entity has an unconditional right to defer the
settlement of the liability for at least twelve months after the reporti ng period, the
loan should be classified as non-current.
b) Yes, the answer will be different if the arrangement for roll over is agreed upon
after the end of the reporting period because as per paragraph 72 of Ind AS 1, “an
entity classifies its financial liabilities as current when they are due to be settled
within twelve months after the reporting period, even if: (a) the original term was
for a period longer than twelve months, and (b) an agreement to refinance, or to
reschedule payments, on a long-term basis is completed after the reporting period
and before the financial statements are approved for issue.” As at the end of the
reporting period, the entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting period.
Hence the loan is to be classified as current.
c) Yes, loan facility arranged with new bank cannot be treated as refinancing, as the
loan with the earlier bank would have to be settled which may coincide with loan
facility arranged with a new bank. In this case, loan has to be repaid within a
period of 9 months from the end of the reporting period, therefore, it will be
classified as current liability.
d) Yes, the answer will be different and the loan should be classified as current. This
is because, as per paragraph 73 of Ind AS 1, when refinancing or rolling over the
obligation is not at the discretion of the entity (for example, there is no
arrangement for refinancing), the entity does not consider the potential to
refinance the obligation and classifies the obligation as current.
8. Ind AS 10 defines ‘Events after the Reporting Period’ as follows:
Events after the reporting period are those events, favourable and unfavourable, that
occur between the end of the reporting period and the date when the financial statements
are approved by the Board of Directors in case of a company, and, by the corresponding
approving authority in case of any other entity for issue. Two types of events can be
identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period)
In the instant case, the demand notice has been received on 15th June, 2017, which is
between the end of the reporting period and the date of approval of financial statements.
Therefore, it is an event after the reporting period. This demand for additional amount
has been raised because of higher rate of excise duty levied by the Excise Department in
respect of goods already manufactured during the reporting period. Accordingly,
condition exists on 31st March, 2017, as the goods have been manufactured during the
reporting period on which additional excise duty has been levied and this event has been
confirmed by the receipt of demand notice. Therefore, it is an adjusting event.
In accordance with the principles of Ind AS 37, the company should make a provision in
the financial statements for the year 2016-17, at best estimate of the expenditure to be
incurred, i.e., ` 15,00,000.
9. (All numbers in `’000 unless otherwise stated)
On 31st March 20X2, ABL Ltd. will report a net pension liability in the statement of
financial position. The amount of the liability will be ` 12,000 (68,000 – 56,000).
For the year ended 31st March 20X2, ABL Ltd. will report the current service cost as an
operating cost in the statement of profit or loss. The amount reported will be ` 6,200. The
same treatment applies to the past service cost of ` 1,500.
For the year ended 31st March 20X2, ABL Ltd. will report a finance cost in profit or loss
based on the net pension liability at the start of the year of ` 8,000 (60,000 – 52,000).
The amount of the finance cost will be ` 400 (8,000 x 5%).
The redundancy programme represents the partial settlement of the curtailment of a
defined benefit obligation. The gain on settlement of ` 500 (8,000 – 7,500) will be
reported in the statement of profit or loss.
Other movements in the net pension liability will be reported as remeasurement gains or
losses in other comprehensive income.
For the year ended 31st March 20X2, the remeasurement loss will be ` 3,400 (refer W.N.).
Working Note:
Calculation of remeasurement gain or loss: ` ‘000
Liability at the start of the year (60,000 – 52,000) 8,000
Current service cost 6,200
Past service cost 1,500
Net finance cost 400
to consolidated statement of profit and loss. The basis for such accounting would be that
due to Parent H Ltd’s transaction of distributing dividend to its shareholders (a
transaction recorded in Parent H Ltd’s equity) and the related DDT set -off, this DDT paid
by the subsidiary is effectively a tax on distribution of dividend to the shareholders of the
parent company.
In accordance with the above, in the given case, CFS of H limited will be as under:
Transactions H Ltd S Ltd Consol CFS H Ltd
Adjustments
Dividend Income (P&L) 120,000 - (120,000) -
Dividend (in Statement of (300,000) (200,000) 120,000 (380,000)*
Changes in Equity)
DDT (in Statement (36,000) (40,000) - (76,000)*
Changes in Equity)
*Dividend of ` 80,000 and DDT of ` 16,000 will be reflected as reduction from non-
controlling interest.
Scenario 2(B): In the given case, share of H Limited in DDT paid by S Limited is `
24,000 out of which only ` 20,000 was utilised by H Limited while paying dividend by its
own. Therefore, balance ` 4,000 should be charged in the consolidated statement of
profit and loss.
In accordance with the above, in the given case, CFS of H limited will be as under:
Transactions H Ltd S Ltd Consol CFS H Ltd
Adjustments
Dividend Income (P&L) 120,000 - (120,000) -
Dividend (in Statement of (100,000) (200,000) 120,000 (180,000)*
Changes in Equity)
DDT (in Statement of - (40,000) 4,000 (36,000)*
Changes in Equity)
DDT (in Statement of - - (4000) (4000)
P&L)
*Dividend of ` 80,000 and DDT of ` 16,000 will be reflected as reduction from non-
controlling interest.
Scenario (3): Considering that as per tax laws, DDT paid by associate is not allowed set
off against the DDT liability of the investor, the investor’s share of DDT would be
accounted by the investor company by crediting its investment account in the associate
and recording a corresponding debit adjustment towards its share of profit or loss of the
associate.
11. (i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be translated
at the closing rate in accordance with paragraphs 39 and 42. In this case the
amount of goodwill will be as follows:
Net identifiable asset Dr. 23 million
Goodwill(bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x ` 84
= ` 117.6 million
(ii)
Particulars EURO in million
Sale price of Inventory 4.20
Unrealised Profit [a] 1.80
• Lessors shall present assets subject to operating leases in their balance sheet
according to the nature of the asset.
• Lease income from operating leases shall be recognised in income on a straight-
line basis over the lease term, unless either:
(a) another systematic basis is more representative of the time pattern in which
use benefit derived from the leased asset is diminished, even if the payments
to the lessors are not on that basis; or
(b) the payments to the lessor are structured to increase in line with expected
general inflation to compensate for the lessor’s expected inflationary cost
increases. If payments to the lessor vary according to factors other than
inflation, then this condition is not met.
The long lease term may be an indication that the lease is classified as a finance
lease. If it is a finance lease then lessor Jeevan India Ltd. shall recognise assets
held under a finance lease in their balance sheets and present them as a receivable at
an amount equal to the net investment in the lease. The recognition of finance income
shall be based on a pattern reflecting a constant periodic rate of return o n the lessor’s
net investment in the finance lease.
Nominal lease rent collected every year will also be accounted every year on accrual
basis.
13. (i) As per Ind AS 113, a fair value measurement of a non-financial asset takes into account
a market participant’s ability to generate economic benefits by using the asset in its
highest and best use or by selling it to another market participant that would use the
asset in its highest and best use.
The highest and best use of a non-financial asset takes into account the use of the
asset that is physically possible, legally permissible and financially feasible, as
follows:
(a) A use that is physically possible takes into account the physical characteristics
of the asset that market participants would take into account when pricing the
asset (eg the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the
use of the asset that market participants would take into account when pricing
the asset (eg the zoning regulations applicable to a property).
(c) A use that is financially feasible takes into account whether a use of the asset
that is physically possible and legally permissible generates adequate income
or cash flows (taking into account the costs of converting the asset to that use)
to produce an investment return that market participants would require from an
investment in that asset put to that use.
Highest and best use is determined from the perspective of market participants,
even if the entity intends a different use. However, an entity’s current use of a
non-financial asset is presumed to be its highest and best use unless market or
other factors suggest that a different use by market participants would maximise the
value of the asset.
To protect its competitive position, or for other reasons, an entity may intend not to
use an acquired non-financial asset actively or it may intend not to use the asset
according to its highest and best use. Nevertheless, the entity shall measure the fair
value of a non-financial asset assuming its highest and best use by market
participants.
In the given case, the highest best possible use of the land is to develop a
commercial complex. Although developing a business complex is against the
business objective of the entity, it does not affect the basis of fair valuation as
Ind AS 113 does not consider an entity specific restriction for measuring the fair
value.
Also, its current use as a parking lot is not the highest best use as the land has the
potential of being used for building a commercial complex.
Therefore, the fair value of the land is the price that would be received when sold to
a market participant who is interested in developing a commercial complex.
(ii) As per Ind AS 113, unobservable inputs shall be used to measure fair value to the
extent that relevant observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or liability at the
measurement date. The unobservable inputs shall reflect the assumptions that
market participants would use when pricing the asset or liability, including
assumptions about risk.
In the given case, DS Limited adopted discounted cash flow method, commonly
used technique to value shares, to fair value the shares of the private company as
there were no similar shares traded in the market. Hence, it falls under Level 3 of
fair value hierarchy.
Level 2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not
active.
(c) inputs other than quoted prices that are observable for the asset or liability.
If an entity can access quoted price in active markets for identical assets or
liabilities of similar companies which can be used for fair valuation of the shares
without any adjustment, at the measurement date, then it will be considered as
observable input and would be considered as Level 2 inputs.
14. Computation of balance total equity as on 1st April, 20X1 after transition to Ind AS
` in
crore
Share capital- Equity share Capital 80
Other Equity
General Reserve 40
Capital Reserve 5
Retained Earnings (95-5-40) 50
Add: Increase in value of land (10-4.5) 5.5
Add: De recognition of proposed dividend (0.6 + 0.18) 0.78
Add: Increase in value of Investment 0.75 57.03 102.03
Balance total equity as on 1 st April, 20X1 after
transition to Ind AS 182.03
Reconciliation between Total Equity as per AS and Ind AS to be presented in the
opening balance sheet as on 1 st April, 20X1
` in crore
Equity share capital 80
Redeemable Preference share capital 25
105
Reserves and Surplus 95
Total Equity as per AS 200
Adjustment due to reclassification
Preference share capital classified as financial liability (25)
Adjustment due to derecognition
Proposed Dividend not considered as liability as on 0.78
1 st April 20X1
Adjustment due to remeasurement
Increase in the value of Land due to remeasurement at fair
value 5.5
Increase in the value of investment due to remeasurement
at fair value 0.75 6.25
Equity as on 1st April, 20X1 after transition to Ind AS 182.03
15. (a) As per para 18 of Ind AS 24, ‘Related Party Disclosures’, if an entity had related
party transactions during the periods covered by the financial statements, it shall
disclose the nature of the related party relationship as well as information about
those transactions and outstanding balances, including commitments, necessary for
users to understand the potential effect of the relationship on the financial
statements.
However, as per para 25 of the standard a reporting entity is exempt from the
disclosure requirements in relation to related party transactions and outstanding
balances, including commitments, with:
(i) a government that has control or joint control of, or significant influence over,
the reporting entity; and
(ii) another entity that is a related party because the same government has control
or joint control of, or significant influence over, both the reporting entity and the
other entity
According to the above paras, for Entity P’s financial statements, the exemption in
paragraph 25 applies to:
(i) transactions with Government Uttar Pradesh State Government; and
(ii) transactions with Entities PQR and ABC and Entities Q, A and B.
Similar exemptions are available to Entities PQR, ABC, Q, A and B, with the
transactions with UP State Government and other entities controlled directly or
indirectly by UP State Government. However, that exemption does not apply to
transactions with Mr. KM. Hence, the transactions with Mr. KM needs to be
disclosed under related party transactions.
(b) It shall disclose the following about the transactions and related outstanding
balances referred to in paragraph 25:
(a) the name of the government and the nature of its relationship with the
reporting entity (ie control, joint control or significant influence);
(b) the following information in sufficient detail to enable users of the entity’s
financial statements to understand the effect of related party transactions on
its financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant,
a qualitative or quantitative indication of their extent.
16. Statement of Cash Flows
` in lacs
Cash flows from Operating Activities
Net Profit after Tax 4,450
As per Ind AS 36, estimates of future cash flows shall not include:
• Cash inflows from receivables
• Cash outflows from payables
• Cash inflows or outflows expected to arise from future restructuring to which an
entity is not yet committed
• Cash inflows or outflows expected to arise from improving or enhancing the asset’s
performance
• Cash inflows or outflows from financing activities
• Income tax receipts or payments.
Hence in this case, cash flows do not include financing interest (i.e. 10%), tax (i.e. 30%)
and capital expenditures to which East has not yet committed (i.e. ` 100 000). They also
do not include any savings in cash outflows from these capital expenditure, as required
by Ind AS 36.
The cash flows (inflows and outflows) are presented below in nominal terms. They
include an increase of 3% per annum to the forecast price per unit (B), in line with
forecast inflation. The cash flows are discounted by applying a discount rate (8%) that is
also adjusted for inflation.
Note: Figures are calculated on full scale and then rounded off to the nearest absolute value.
Year ended 20X3-X4 20X4-X5 20X5-20X6 20X6-X7 20X7-X8 Value in
use
Quantity (A) 10,000 10,500 11,025 11,576 12,155
Price per unit(B) ` 200 ` 206 ` 212 ` 219 ` 225
Estimated cash ` 20,00,000 ` 21,63,000 ` 23,37,300 ` 25,35,144 ` 27,34,875
inflows (C=A x B)
Misc. cash inflow ` 80 000
disposal
proceeds (D)
Total estimated ` 20,00,000 ` 21,63,000 ` 23,37,300 ` 25,35,144 ` 28,14,875
cash inflows
(E=C+D)
Cost per unit (F) ` 160 ` 162 ` 165 ` 168 ` 171
(L=J x K)
Here, the manufacturer should recognize a provision based on the best estimate of
the consideration required to settle the present obligation as at the reporting date.
(b) The expected value of cost of repairs in accordance with Ind AS 37 is:
(80% x nil) + (15% x ` 20,00,000) + (5% x ` 50,00,000) = 3,00,000 + 2,50,000
= 5,50,000
19. Calculation of Deductible temporary differences:
Deferred tax asset = ` 80,000
Existing tax rate = 40%
Deductible temporary differences = 80,000/40%
= ` 2,00,000
Calculation of Taxable temporary differences:
Deferred tax liability = ` 60,000
Existing tax rate = 40%
Deductible temporary differences = 60,000 / 40%
= ` 1,50,000
Of the total deferred tax asset balance of ` 80,000, ` 28,000 is recognized in OCI
Hence, Deferred tax asset balance of Profit & Loss is ` 80,000 - ` 28,000 = ` 52,000
Deductible temporary difference recognized in Profit & Loss is ` 1,30,000 (52,000 / 40%)
Deductible temporary difference recognized in OCI is ` 70,000 (28,000 / 40%)
The adjusted balances of the deferred tax accounts under the new tax rate are:
Deferred tax asset `
Previously credited to OCI-equity ` 70,000 x 0.45 31,500
Previously recognised as Income ` 1,30,000 x 0.45 58,500
90,000
Deferred tax liability
Previously recognized as expense ` 1,50,000 x 0.45 67,500
The net adjustment to deferred tax expense is a reduction of ` 2,500. Of this amount,
` 3,500 is recognised in OCl and ` 1,000 is charged to P&L.
Journal Entries
` `
Deferred tax asset 3,500
OCI –revaluation surplus 3,500
Deferred tax asset 6,500
Deferred tax expense 6,500
Deferred tax expense 7,500
Deferred tax liability 7,500
Alternatively, a combined journal entry may be passed as follows:
` `
Deferred tax asset Dr. 10,000
Deferred tax expense Dr. 1,000
To OCI –revaluation surplus 3,500
To Deferred tax liability 7,500
20. (i) As an only exception to the principle of classification or designation of assets as
they exist at the acquisition date is that for lease contract and insurance contracts
classification which will be based on the basis of the conditions existing at
inception and not on acquisition date.
Therefore, H Ltd. would be required to retain the original lease classification of the lease
arrangements and thereby recognise the lease arrangements as finance lease.
(ii) The requirements in Ind AS 37 ‘Provisions, Contingent Liabilities and Conting ent
Assets’, do not apply in determining which contingent liabilities to recognise as of
the acquisition date as per Ind AS 103 ‘Business Combination’. Instead, the
acquirer shall recognise as of the acquisition date a contingent liability assumed in a
business combination if it is a present obligation that arises from past events and its
fair value can be measured reliably. Therefore, contrary to Ind AS 37, the acquirer
recognises a contingent liability assumed in a business combination at the
acquisition date even if it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation. Hence H Ltd. will
recognize contingent liability of ` 2.5 cr.
Since S Ltd. has indemnified for ` 1 cr., H Ltd. shall recognise an indemnification
asset at the same time for ` 1 cr.
As per the information given in the question, this indemnified asset is not taxable.
Hence, its tax base will be equal to its carrying amount. No deferred tax will arise on it.
(iii) As per Ind AS 103, non-current assets held for sale should be measured at fair
value less cost to sell in accordance with Ind AS 105 ‘Non-current Assets Held for
Sale and Discontinued Operations’. Therefore, its carrying value as per balance
sheet has been considered in the calculation of net assets.
(iv) Any equity interest in S Ltd. held by H Ltd. immediately before obtaining control over
S Ltd. is adjusted to acquisition-date fair value. Any resulting gain or loss is
recognised in the profit or loss of H Ltd.
Calculation of purchase consideration as per Ind AS 103 ` in lakh
Investment in S Ltd.
On 1st Nov. 20X6 15% [(12/100) x 395 x 15%] 7.11
On 1st Jan. 20X7 45%
Own equity given 10,000 x 12% x 45% x 1/2 270
Cash 50
Contingent consideration 22
349.11
(v) Calculation of deferred tax on assets and liabilities acquired as part of the business
combination, including current tax and goodwill.
Item ` in crore
Book Fair Tax Taxable Deferred
value value base (deductible) tax assets
temporary (liability)
difference @ 30%
Property, plant and 40 90 40 50 (15)
equipment
Para 49 states that during the measurement period, the acquirer shall recognise
adjustments to the provisional amounts as if the accounting for the business
combination had been completed at the acquisition date.
Para 50 states that after the measurement period ends, the acquirer shall revise the
accounting for a business combination only to correct an error in accordance with
Ind AS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.
On 31st December, 20X7, H Ltd. has established that it has obtained all the
information necessary for the accounting of the business combination and the more
information is not obtainable. Therefore, the measurement period for acquisition of
S Ltd. ends on 31 st December, 20X7.
On 31st May, 20X7 (ie within the measurement period), H Ltd. learned that certain
customer relationships existing as on 1 st January, 20X7 which met the recognition
criteria of an intangible asset as on that date were not considered during the
accounting of business combination for the year ended 31 st March, 20X7.
Therefore, H Ltd. shall account for the acquisition date fair value of customer
relations existing on 1 st January, 20X7 as an identifiable intangible asset. The
corresponding adjustment shall be made in the amount of goodwill.
Accordingly, the amount of goodwill will be changed due to identification of new
asset from retrospective date for changes in fair value of assets and liabilities earlier
recognised on provisional amount (subject to meeting the condition above for
measurement period). NCI changes would impact the consolidated retained
earnings (parent’s share). Also NCI will be increased or decreased based on the
profit during the post-acquisition period.
Journal entry
Customer relationship Dr. 3.5 crore
To NCI 1.4 crore
To Goodwill 2.1 crore
However, the increase in the value of customer relations after the acquisition date
shall not be accounted by H Ltd., as the customer relations developed after
1st January, 20X7 represents internally generated intangible assets which are not
eligible for recognition on the balance sheet.
(c) Since the contingent considerations payable by H Ltd is not classified as equity
and is within the scope of Ind AS 109 ‘Financial Instruments’, the change s in the
fair value shall be recognised in profit or loss. Change in Fair value of contingent
consideration (23-22) ` 1 crore will be recognized in the Statement of Profit and
Loss.